Home loan jargon busting: Which three mortgage terms are most confusing homebuyers?

Break costs refers to fees you’ll pay your lender if you exit a home loan before the fixed rate period is up.

When you apply for a home loan, you can choose to pay interest at a variable or fixed rate. Variable rates may rise or fall depending on factors in the economy such as the RBA cash rate, but fixed rates stay the same for a limited time (often between one and five years). This can be useful for some borrowers, as they can know exactly what their mortgage repayments will stay at for the fixed term, and budget accordingly.

Taking out a fixed rate home loan means agreeing to pay a fixed amount of interest over this time period. But if you were to exit the loan early for any reason during this time period, such as if you were to refinance the loan or sell your house, you could be in breach of the agreement. As this means the lender will need to revise its own budgets, it may charge break fees to help cover any financial shortfalls due to changing economic conditions.

The cost of break fees can vary depending on the lender, the size of your loan, how long was left to run on your fixed rate period, and how much interest rates have changed since you first took out the loan. Generally, the more that interest rates have fallen since you first took out your fixed rate home loan, the higher your break costs may be. On the other hand, if interest rates have risen, you may be charged much less.

Short for Loan to Value Ratio, LVR is a number that shows the size of your home loan compared to the value of your property. For example, if you have a $400,000 loan on a $500,000 property, your LVR is 80%. 

LVR can seem confusing because it’s the opposite of how many home buyers see mortgages. Rather than comparing the loan to the property value, we often think of the size of the deposit a lender requires. For example, a home loan with an 80% LVR would need a 20% deposit. 

Once you have your mortgage, your LVR is affected by your equity in the property – that is, how much of the property you own outright, without a mortgage owing on it. You can increase your equity by making principal and interest repayments and extra repayments. Your equity may also increase over time if your property’s value grows. To follow the earlier example, if you paid back $100,000 of your $400,000 loan, and your property is now valued at $600,000, you’ll now have a $300,000 loan on a $600,000 property, for a 50% LVR.

The lower your LVR, the lower the interest rates you may be eligible for. This is why home loans for refinancers can often have lower rates than mortgages for first home buyers. You may also be able to use the equity in your property for other purposes, like taking out a home equity loan or line of credit, or even buying an investment property.

If you apply for a mortgage with a smaller deposit of 10% or 5%, your LVR will be 90% or 95%. If your LVR is higher than 80%, you’ll likely need to cover the cost of Lenders Mortgage Insurance (LMI).

A redraw facility is a home loan feature that lets borrowers withdraw any extra repayments they’ve previously made on their mortgage, for those times when you need that money back in your pocket.

When you get a home loan, you’re required to make regular minimum repayments, based on the loan size, the length of the loan term, and the current interest rate. But many mortgage lenders offer the options to make extra repayments and pay your home loan back faster. The more of your home loan’s principal you can pay off, the more you can reduce your interest charges, and the sooner you can get out of debt.

However, it’s possible that after you’ve put your spare savings into your home loan to reduce your interest, you’re hit up for an unexpected expense, such as car repair or medical bills. A redraw facility means you may be able to get this money back rather than having it tied up in your home loan.

Depending on the lender, your redraw facility may allow you to freely access any extra repayments you’ve previously made in the past, or you may be limited to a maximum amount per redraw. Some lenders may also charge a fee for making redraws, or limit the number of redraws you can make. Be sure to check the terms and conditions before you make a redraw facility part of your personal financial strategy.

It’s important to do your research around home loans and carefully compare your options before making any decisions. You could also contact a mortgage broker for more personal assistance. These home loan experts can not only talk you through any tricky home loan jargon, but can take a close look at your financial situation and help you find a mortgage offer that suits your goals.